How to be a Consistently Profitable Trader — Without Paying For Trading Courses

http://www.tradingwithrayner.com/how-to-be-a-consistently-profitable-trader-without-paying-for-trading-courses/

You’re frustrated.

After reading countless books, attending trading courses, and trading for years, you are not consistently profitable.

I’ve been there myself. Going round in circles for years till one day, something clicked.

It isn’t about the latest trading indicator, predicting fundamental news or having the fastest internet connection.

So, what is it that separate the winners from losers?

You will want to read every word in this post. I will show you step by step to becoming consistently profitable, without spending a single cent.

The law of large number

Before anything else, you must understand the law of large number and how it affects your trading. But what is the law of large number?

The law of large numbers is a theorem that describes the result of performing the same experiment a large number of times. According to the law, the average of the results obtained from a large number of trials should be close to the expected value, and will tend to become closer as more trials are performed. – Probability Theory

As a trader, this means you need a large number of trades to allow your edge to play out in the markets.

You will not be consistently profitable every week, taking 5 trades a month. Why?

Because according to the law of large number,  results are random in the short term, but will be closer to the expected value as more trials are performed.

Focus on whether what you are doing is right, not on the random nature of any single trade’s outcome. – Richard Dennis

What is consistency?

Since the law of large number requires a certain number of trades for your edge to play out,  how does it affect your trading?

High frequency trading – Trading at very high frequency, like 10,000 trades a month. You can expect to be profitable every month, or everyday like Virtu Financial.

Day trader – Trading an average of 3 – 5 times a day, you can expect to be profitable every quarter.

Swing/position trader – Trading an average of 5 – 15 times a month, you can expect to be profitable every year.

The more trades you put on during a shorter period of time, the faster your edge will play out. But without an edge in the markets, the more trades you put on will lead to blowing up your account even faster.

If you understand this, you are ahead of 90% of traders out there. Next, I will share with you the steps you can take to be consistently profitable.

Find your trading style

I don’t think traders can follow rules for very long unless they reflect their own trading style – Ed Seykota

The first step is to find a trading style that suits you. Not only that, it has to also fit your schedule. If you have a full time job, it does  not make sense to be a day trader.

Since there are many trading styles adopted by different traders, what is the best way to find one that suits you?

I would encourage you to read ‘Market Wizards‘ as it interview successful traders with various trading styles. This way you can learn what works in the market, and pick one trading style that you like.

Once you have decided on a trading style that suits you, find out everything you can on it. (Assuming you want to adopt a trend following approach)

This includes:

Academic research papers – You can google academic research papers. E.g. Search for ‘trend following academic research papers’. These are useful research papers you can explore.

Books – Search for books relevant to your trading style. E.g. Search for ‘trend following’ on Amazon. Here are a list of books that I would highly recommend.

YouTube – Watch videos and learn the thought process of other traders. E.g. Search for ‘trend following’ on YouTube.

Google – You can always find hidden gem here. Like interviews, podcasts, or blogs related to trend following.

Social Media – You can connect with traders who are successful. Follow them on Twitter and Facebook etc. Some of the traders I follow are Steve Burns, Rolf, Uktrendfollower and Jon Boorman.

Now, use all these information you have and build a trading plan.

Develop your trading plan

A trading plan is a structure, or a set of guidelines, that defines your trading. It removes subjectivity in your trading, minimize the roller coaster emotions, and keeps you prepared at all times.

 So, how do you develop a trading plan? Below are 6 essential questions that every trading plan must answer:

1. Risk management

You must know how much risk you are putting on each trade, and how it will change as your trading capital increase/decrease over time. What % of your account will you risk on each trade?

2. When to enter

You need to define how you will enter a trade. What are the conditions required to put on a trade?

3. When to exit if you are wrong

Whenever you enter a trade, you must know the point at which you are wrong, and get out. Which is the point on the chart that will prove your wrong?

4. When to exit if you are right

When price goes in your favor, you must know how you will exit your trade. Would you trail your stops or set a profit target ahead of time? Would you look to take partial or full profit?

5. Markets traded

You must know which markets you will be trading. Would you trade all markets, or just trade a certain sector?

6. Time frame traded

You must know the time frame you are executing your trades. For day traders, you would be trading lower time frames like 5 minutes. For swing/position trader, you would be trading higher time frames like 4 hour or daily. Which time frame will you enter your trades?

Disclaimer: Below is a sample trading plan that I came up with randomly, please do your own due diligence.

Sample trading plan

I like to use the IF THEN syntax in my trading plan. It helps keep me more objective with lesser room for discretion.

If I am trading, then I will only trade Eurusd and Audusd. (The markets you are trading)

If I place a trade, then I will not lose more than 1% of my account. (Your risk management)

If 100 EMA is above 200 EMA on daily, then the trend is bullish. (Conditions before entering a trade and time frame you are trading)

If trend is bullish, then identify area of support where price can retrace to. (Conditions before entering a trade)

If price retrace to your area of support, then wait for a higher close. (Conditions before entering a trade)

If price close higher, then enter long at next candle open. (Entry)

If you are long, then place your stop loss below the low of the candle, and take profit at swing high. (Exit when you’re wrong, and when you’re right)

Plan your trades. Trade your plan. – Linda Rasckhe

Execute your trading plan

Once you have completed your trading plan, then forward test it in the live markets.

You can either forward test it on demo, or live account. I would suggest trading micro lots on your live account, so you can take into account how psychology affects your trading.

You have to execute your trades consistently according to your trading plan. This is where your discipline comes into play, only taking trading setups that meet your trading plan.

Warning 1: If you entering trades based on how you feel instead of following your trading plan, then it would be impossible to tell whether your trading plan has an edge in the markets.

Warning 2: Do not change your trading plan, or jump onto another trading system when you are having a series of losses. (I know you are tempted to do so)

Recall earlier the law of large number? Results are random in the short term, but will be closer to the expected value as more trials are performed.

This means if you change your trading plan after a few losing trades, you will never know if you have an edge in the markets. And you will be running around in circles forever!

I would recommend having a sample size of at least 100 trades, before deciding whether your trading plan has an edge in the markets.

Record down your trades

Executing your trades consistently isn’t enough. You must record down your trades to collect relevant statistical data. Why?

So you can make an objective conclusion and know whether your trading plan has an edge in the markets.

You can easily do this on an excel spreadsheet with the relevant metrics below:

Date – Date when your trade is entered

Time Frame – The time frame you are entering on

Setup – The trading setup that trigger your entry

Product – Financial product that you trade E.g. Apple, Gold, Eur/usd

Lots – Position size you entered

Long/short – Direction of your trade

Tick value – Value per pip. E.g. 1 standard lot of Eurusd is $10/pip

Price In – Price you enter your trade

Price Out – Price you exited, at profit or loss

Stop loss – Price where you will exit your trade if wrong

Profit & loss – Profit or loss from this trade

Initial Risk in $ – Nominal risk value of this trade

R – Your initial risk of this trade. E.g If you made 2 times your initial risk, you made 2R

An example below

However if you want a free trading journal that automates everything, you can check outMyFxBook or FxBlue.

Review your trades

After you have a sample size of 100 trades, you can look to review your statistics to see whether you have an edge in the markets.

The most important trading equation you must know:

Expectancy = (Winning % * Average win) – (Losing % * Average loss) – (Commission + slippage)

If you have a positive expectancy, congratulations! You have an edge in the markets.

But what if you don’t have?

You can consider:

Increase your winning % – Be more selective with your entries. Look for other confluence factors that can be added to your trading plan.

Increase your average win – Ride your winners longer. You can do this by trailing your profits as price move in your favor.

Decrease your average loss – Cut your losses. You can do this by cutting your losers quickly.

Note: If you do not have an edge in the markets, increasing your frequency of trades will not make you profitable. It will only make you lose faster than before.

Likewise, reducing your risk per trade, will still cause you to lose, but at a slower pace.

Once you have identified the issues and come up with a solution, then repeat the entire process over again. Develop >> Execute >> Record >> Review

Unfortunately there is no one size fits all. Different traders would encounter different issues with their trading plan, and it is your duty to find out what to fix.

Conclusion

I have laid out step by step on what you must do as a trader, to be consistently profitable. If you follow this methodology, you will greatly improve your odds of being a consistently profitable trader.

Remember DERR, Develop >> Execute >> Record >> Review

So, how else can you become a consistently profitable trader?

3 Indispensable Tips on Stock Trading

Posted on February 2, 2015

Stock trading is one of the trickiest and riskiest businesses to be involved in. To reach the heights of success in this field, one must be super sensitive and responsive to the minute changes that take place in the stock market. For every change that you ignore, one golden opportunity to maximize your profits passes you by.

Strategizing is key to prosperity in stock trading. You need to constantly come up with new strategies to stay in the game. If you don’t stick to a game plan, you may find yourself lost in the vast and unpredictable world of stock trading. Here are 3 vital ways in which you can avoid slipping into the whirlwind of stock market failure.

1) Find opportune hours to trade

Successful stock traders all have one thing in common, and that is immaculate timing. You need to know when to play your cards and when to fold. As you probably, stock trading can be done at any time of the day, but is there any particular time that’s more conducive for trading than other hours? Well, the answer is yes. The hours of 1 pm to 2:30 pm (US) are considered as an opportune time for trading stocks. There are a couple of reasons for this.

Firstly, it’s the time of the day when every individual and organization is engrossed with work. In other words, the stock market operations are in full flight and the activity is at an all time high. Don’t sit back and relax during these hours. Be as active and engaged like the others

Secondly, this is the time by which the effects of any global or local events can already be seen on the financial market. In simpler words, any event that may have an impact on the stock market, takes place before the hours of midday. As a result, the risks involved in trading after 1 pm is relatively low.

2) Trade in season

There is a peak season and an off season for everything. Stock trading is no exception. According to the experts, the best time of the month to make investments in stock is between the 18th and the 22nd. This is when the prices are low, and the cash flow in the market is smooth.

If you are eager to sell stocks, then forget about the aforementioned dates. Selling stocks is a whole different ball game from buying stocks. As a seller, it’s the first two days or the last two days of the month that you should be aiming at.

It’s also worth noting that April and early May are the two months that prove to be most favourable for selling stocks.

3) Keep an eye on $10 shares

$10 shares should be your investment of choice. The only other shares that you should keep an eye on are closed end funds. Closed end funds are low priced (below $10 a share) so that small and medium investors can purchase them with ease. However, it’s important for you to not confuse closed end funds with cheap shares that are well below $10.

Stocks lower than $10 are usually quoted at greater percentage spreads between the buying and selling prices. As a result, you will need a heftier price to break even. In addition to that, companies that are going through financial troubles, or the ones that are on the verge of bankruptcy have really low priced stocks. Whichever the case is, it is always preferable to buy stocks that have a trading value of $10 or more.

Stepping into the world of stock trading without adequate knowledge can be a fatal mistake. Failing to evolve as you go along in this business will also pull you down to the bottom end of the food chain. Keep these 3 tips in mind and you will give yourself a chance of surviving in this hostile and volatile environment.

One trader’s advice: Don’t aim to be a jack-of-all-trades

There’s only one good strategy for trading online, says Mike Ser.

For a decade and a half, Mr. Ser has been trading independently online. He has mentored others like him and partnered with one of the people he coached and who made $1.7-million in five months in gold and silver after years struggling to learn the markets.

The best general strategy for traders, Mr. Ser argues, is not to try to pick apart the minutiae of myriad financial securities and markets. Such a broad approach takes too much time and inevitably leads to frustration and potential losses, he insists.

Instead, traders need to specialize, particularly those who don’t trade full time. “They need to be an expert in a specific area. They need to be really good at something, rather than be a handyman about everything in the financial market,” he says.

“It could be a certain sector. It could be a certain strategy,” Mr. Ser says. “Some of our students and traders only trade a certain stock every single day.”

It’s a strategy used by traders at big investment banks, who are experts in such arcana as, say, commodity futures or the repurchase-agreement market. And even though Mr. Ser and some traders in his workshops may look like day traders, sitting at a gaggle of terminals, trying to make a buck on tiny, minute-by-minute market movements, they are instead taking a different approach.

Call it swing trading or trend trading. It’s about holding a security for a few days or months – and being expert enough in that security to set a goal indicating when to sell, such as when a big shift occurs in the market. “They buy until the trend reverses, and then they switch their direction,” Mr. Ser said.

Take the experience of Andy Man, who is Mr. Ser’s business partner. Mr. Man started trading in 2006 in various markets such as tech stocks. It wasn’t until he specialized in gold and silver that he hit big, by taking short positions in the two commodities. He bet that gold and silver prices would drop as the lure of these commodities as a safe haven would diminish when other markets improved. This was in 2011, but he had seen a similar situation pass by in 2008 without taking advantage of it.

As Mr. Ser described it, Mr. Man’s strategy was to accumulate additional short positions rather than take shorter-term profits and exit the market. He was fortunate. His initial position of $1,600 turned into $1.7-million in less than half a year.

“Instead of exiting, he added more to his positions, and that’s where his capital grew very, very quickly,” Mr. Ser said, noting that this changed his outlook on how to train other traders. Mr. Man “looked at this sector for five to six years before he had success. So, it takes time to develop the expertise. But once you develop [it], you have a greater advantage over other people.”

The important thing is to establish a target price at which to exit the position, and then stick to it. “When it reaches our target – and it doesn’t matter how long it takes to get there – we will exit that position,” he added.

With a business degree from Simon Fraser University but no financial background, Mr. Ser began trading himself in 1999 during the dot-com boom, when online day-trading was relatively new. The aim then was to get in and out of a security quickly with a profit. Yet much of that allure disappeared during the subsequent dot-com crash, and then again in the rout of markets in 2008 to 2009.

Another benefit of becoming an expert in one sector or security is based in lifestyle. It enables one to tailor trading to fit a schedule. For instance, gold and silver are traded effectively around the clock and around the world, allowing more flexibility than smaller, specialized sectors such as technology or resource stocks.

“At the end of the day, what is that person’s objectives? What’s the person’s lifestyle? Does he want to trade every day? Does he want to be sitting in front of a computer? Is he a morning person or an evening person? What are his goals?” Mr. Ser said.

“A lot of those types of things will help us decide whether a person should be trading only for a few minutes or a few hours a day, or only looks at a computer once a day and [should be] longer-term. We’re kind of customizing everything to fit the trader, rather than having them emulating exactly what we do.”

Concentrating on one area allows some traders to glance at the market as seldom as once a day. If there is no buying or selling opportunity, they can check again tomorrow. “If you only choose a certain area to focus on, then you’re looking at the same thing every day,” and that’s a good thing, Mr. Ser insisted.

He is careful to warn that all trading like this should be done with discretionary money – money you don’t need for living expenses. “Risk capital is the amount of money you don’t need to pay your monthly bills,” he said.

There are the obvious financial reasons not to bet one’s mortgage on trading. There are also the less obvious, psychological ones.

“I’ve seen some traders trade with money they need to pay the rent with, so they’re trading very scared and not making logical decisions,” Mr. Ser said. “Everybody’s different, but make sure you trade with risk capital that you can afford to lose.”

The above article is an extract of from http://www.theglobeandmail.com/globe-investor/how-a-trader-turned-1600-into-17-million-in-six-months/article21592425/

A Day In The Life Of A Day Trader

http://www.investopedia.com/articles/professionals/052113/day-life-day-trader.asp
A Day In The Life Of A Day Trader

By Jean Folger   A A A

Related Searches: Yahoo Finance, Etrade, Ameritrade, Marketwatch, Financial Definitions

Traders participate in the financial markets by buying and selling stocks, futures, forex and other securities, and closing out positions with the intention of making small, frequent gains. Just as there are many types of investors, traders range from the small, independent trader working from a home office to the institutional player who moves tens or hundreds of millions of dollars worth of shares and contracts each trading session.

Traders and Trading Styles
Traders are further defined by the timeframe in which they open and close positions (the holding period), and the method by which they find trading opportunities and send orders to the market. Discretionary traders are decision-based traders who scan the markets and place manual orders in response to information that is available at that time. System traders, on the other hand, use some level of automation to implement an objective set of rules, allowing a computer to both scan for trading opportunities and handle all order entry activity. The chart below lists the different trading styles with the corresponding timeframe and method for each.

Trading style	Timeframe (holding period)	Method
Position trading	Months to years	Discretionary or system
Swing trading	Days to weeks	Discretionary or system
Day trading	Day only – no overnight positions	Discretionary or system
Scalp trading	Seconds to minutes – no overnight positions	Discretionary or system
High frequency trading	Seconds to minutes	System only

Because of this diversity among traders, there really is no such thing as a "typical" day in the life of a trader. With that in mind, let's take a look at what a day may be like for an individual, discretionary day trader, since this is where many people begin trading.

Pre-Market
Before the markets spring to life at 9:30 a.m. EST, most day traders are busy catching up on any events that happened overnight that could affect that day's trading session, coffee and breakfast in hand. This involves reading stories from various newspapers and financial web sites, as well as listening to updates from financial news networks, such as CNBC and Bloomberg. The futures markets, as well as the broad market indexes, are noted as traders form opinions about the direction they expect the market to trend. Traders will also review economic calendars to find out which market-moving financial reports – such as the weekly petroleum status report – are due that day. It should be noted that many traders participate in round-the-clock markets, such as futures and forex, and these traders can expect increased volume before the rest of the markets open at 9:30.

After reading about events and making note of what the analysts are saying, traders head to their workstations, turn on their computers and monitors, and open up their analysis and trading platforms. A lot of layers of technology are at work here, from the trader's computer, keyboard and mouse, to the Internet, trading platform, broker and ultimately the exchanges themselves. As such, traders spend time making sure that everything on their end is functioning correctly before the trading session begins.

If everything is working properly, traders start scanning the markets for potential trading opportunities. Some traders work just one or two markets (such as two stocks or two e-minis), and will open up these charts and apply selected technical indicators to see what's going in those markets. Others use market scanning software to find securities that meet their exact specifications. For example, a trader might scan for stocks that are trading above their 52-week highs, with at least 4,000,000 in volume and with a minimum price of $10.00. Once the computer compiles a list of stocks that meet these criteria, the trader will put these tickers on his or her watch list.

Early Trading
The first half-hour of trading is typically pretty volatile, so many (but certainly not all) individual traders sit on the sidelines to give the market time to settle and avoid being instantly stopped out of a position. Now it's a waiting game, while traders watch for trading opportunities that are based on their trading plans, experience, intuition, and current market activity. Precision and timing become increasingly important the shorter the holding period for the trade and the smaller the profit target. Once an opportunity arises, the trader must act quickly to identify the set up and pounce on the trade – seconds can make the difference between a winning and losing trade.

The trader uses an order entry interface to submit orders to the market. Many traders will also submit simultaneous orders for profit targets and stop losses to protect against adverse price moves. Depending on the trader's goals, he or she will either wait for this position to close out before entering another one, or will continue scanning the markets for additional trading opportunities. Many traders look for late morning reversal opportunities. Since trading volume and volatility diminish as mid-day approaches, most traders will hope that any positions will reach their profit targets before lunch. Otherwise, the next couple hours can be rather uneventful (and boring) as the big money is out to lunch and the markets slow down.

Second Wind
Once the institutional traders are back from lunch and meetings, the markets pick up and volume and price movement once again comes to life. Traders take advantage of this second wind, looking for additional trading opportunities before the markets close at 4:00. Any positions entered during the morning will have to be closed before the end of the day, as will any positions that are taken now, so traders are keen to get in trades as soon as possible so they have time to reach a profit target before the session's end.

Traders continue to monitor their open positions and look for any more opportunities. Because day traders do not hold their positions overnight, many set a time limit past which they will not open any additional positions (such as 3:30 p.m., for example). This helps ensure that the trade will have enough time to make a profit before the markets close. As 4:00 approaches, the trader closes all open positions and cancels any unfilled orders. This is an important step, since open orders can get filled without the trader realizing it, resulting in potential losses. The trader will close the day with a profit, at breakeven, or with a loss. Either way, it's just another day at the office, and seasoned traders know to neither celebrate large wins nor cry about losses. To traders, it's what happens over time – in terms of months and years – that matters.

Post Market
After the markets close, traders finish up the day by reviewing their trades, making note of what went well and what could have been done better. Many discretionary traders use a trading journal – a written log of all trades, including ticker symbol, set-up (why the trade was taken), entry price, exit price, number of shares, and any notes about the trade or what was going on in the market that may have affected the trade. If organized and consistently used, a trading journal can provide vital information to a trader looking to improve his or her plan and performance. Many traders will again listen to a financial news network to get a recap of the day and start making plans for the next trading session.

The Bottom Line
Outside of a day trader's pre and post-market day, a lot of time is spent on research – learning about the markets, experimenting with technical indicators and honing their order entry skills, using simulated trading platforms. Most traders likely have a story they can laugh at now about the time they hit "sell" instead of "buy," or when they entered 1000 shares instead of 100, or both.

Day trading has many advantages: you can be your own boss, set your own schedule, work from home and achieve unlimited profits. While we often hear about these perks, it's important to realize that day trading is hard work, and you could put in a 40 hour work week and end up with no "pay check." Day traders spend much of their days scanning the markets for trading opportunities and monitoring open positions, any many of their evenings researching and improving their trading plans. Because trading can be a very solitary endeavor, some traders choose to participate in trading "chat rooms" for social and/or educational purposes.

Psychological Capital

Trading After A Blow Up and Knowing Your Psychological Capital

05 Jul, 2014 Alvin Chow 

I blew up my options trading account in Jan 14.

How is life after that? Am I still trading? Some friends would ask.

Yes, I am. In fact, I resumed trading within a week. I topped up the account with US$10,000, a far cry from the amount I have lost.

I wasn’t used to the trade size at first and I fully understood how Tom Yuen felt when he resumed trading after his blow up. It was really negligible amount that you do not feel like trading. There is no kick to an alcoholic who could only drink a sip of beer.

But this is a punishment. Because I could not handle a big capital with my emotions acting up, so I must trade small. As the saying goes, “great powers come with great responsibilities”. I can also say, “large capital come with great emotional control”. It is not how much capital you have, but how well can you trade without getting emotionally affected. Let’s call this Psychological Capital.

Leverage Wants to Blow You Up

People are often attracted to trading because the returns are higher over a shorter period of time. And they can often do it with smaller capital.

To do so, the main source of profits have to come from leverage. If the price of a stock or forex pair moves 1-2% daily, you cannot force it to move more. The only way to increase your returns is to take leverage. We need to accept that making higher returns essentially means taking more leverage. Just like property investing, the main source of returns is leverage. Strip out the leverage and property returns looks average.

If you have to take leverage, you stand a chance to blow up. Below is the table to illustrate my point. If you have taken just 2 times leverage, a 50% move against your position would have blew up your account. Hence, you would have less tolerance for volatility going against you. And to make things worse, traders tend to choose instruments that move more – so they do not have to wait that long to see results and technical analysis work better with price movements.

Hence, it is not that trading is risky. It is risky if you have taken leverage.

There are ways to protect you – position sizing and cutting losses. You would have read numerous literature and listened to enough gurus preaching about these two important tenets of trading. They exist because of leverage. Because there is a chance to blow up your account, you need to chop off your limb before the poison gets to your brain and kill you.

Psychological Capital

Easy to say – position size, cut loss, follow the rules.

To do all these requires big Psychological Capital. I do not believe that discipline is a solution. The key is to find out how much capital you can trade without you panicking when things go wrong.

For example, I know my Psychological Capital is between US$10,000 to US$85,000. The latter is how much I blew up. I can never trade that amount and maintain my sanity. You should have seen how I was procrastinating cutting losses in Jan. I do not know my exact threshold yet, but at least I have established a range. I can tell you that trading US$10,000 was a breeze for me. I had no problems cutting losses for the past week and that is what trading should be. You do not FREEZE when you need to take actions.

Here are my results since the disastrous January (all in USD):

• Jan: -$84,496.25
• Feb: +$1,680
• Mar: +$1,138
• Apr: +$1,460
• May: +$1,732.50
• Jun: -$699.17

Trading is a risky game because of leverage. To execute the cut loss properly, we need to trade below our Psychological Capital.

Have you figured out your Psychological Capital? If yes, are you trading below it?

Bernard Baruch - A Stock Speculator

Baruch was recognized as one of Wall Street’s financial leaders and his teachings are as valuable today as decades ago. These are well documented in his book Baruch: My Own Story(1957) in which, among others, he said: “I have heard many men talk intelligently, even brilliantly, about something – only to see them proven powerless when it comes to acting on what they believe.”

Baruch started out as most traders do – i.e. losing lots of money because he lacked the knowledge, experience and discipline. “You have to lose money in order to better yourself.”

Real success in the market takes time and money. Unfortunately “most people view the market as the place where the miracle of great and quick riches can be performed with little effort”.

Overtrading and holding too many positions in his early years caused Baruch to go broke many times before he developed the discipline to succeed.

A successful speculator is “a man who observes the future and acts before it occurs”.Acting swiftly in the market is important.

After losing money as a result of the recommendation of others, Baruch focused on the facts.“One must search through a maze of complex and contradictory details to get to the significant facts … Then he must be able to operate coldly, clearly, and skilfully on the basis of those facts.” The challenge for the successful speculator is “how to disentangle the cold hard facts from the rather warm feelings of the people dealing with the facts.” Moreover, “if you get all the facts, your judgment can be right; if you don’t get all the facts, it can’t be right”.

Be honest with yourself and expect to be wrong as many times as you are right. “If a speculator is correct half of the time, he is hitting a good average. Even being right 3 or 4 times out of 10 should yield a person a fortune if he has the sense to cut his losses quickly on the ventures where he is wrong.” Cutting losses quickly was THE most important trading rule.

Don’t underestimate the power of thinking. “During my eighty-seven years I have witnessed a whole succession of technological revolutions. But none of them has done away with the need for character in the individual or the ability to think.”

If your stocks are keeping you awake a night worrying about them, you should sell them to a“sleeping point”.

The way to truly succeed in the market is to devote oneself full-time to the task. “Because of the extreme challenge, one must commit full attention to it.” Market speculation is “no different than trying to be a successful doctor or lawyer … you simply must devote yourself full-time to the study of your craft”.

Through experience, Baruch learned the golden rule – never take stock tips from others. Self-reliance and “doing one’s own thinking” are a must.

Baruch found it best to keep silent about his positions and trades and he believed it was “best to trade alone”. When he retired from A.A. Housman & Company and went on his own, Baruch did so because he thought it was best to trade independently and remain focused in order to achieve the greatest profits. “Most of the successful people I’ve known are the ones who do more listening than talking.”

Baruch would often trade both sides of the market – long and short. “Having flexibility should not be underestimated.”

About risk, he said: There is no investment which does not involve some risk and is not something of a gamble.” Moreover, “what we can try to do perhaps is to come to a better understanding of how to reduce the element of risk in whatever we undertake”.

Baruch did not believe in diversification, but that it was “better to have a few stocks and to watch them carefully”.

Having a “good supply of cash on hand at all times in reserve is important” to take advantage of market declines and major crashes.

He believed that traders should focus on one thing at a time. He thought no one could be an expert at too many things. He liked to focus on “one thing at a time, perfect it, and do it well”.

Baruch believed the two main mistakes that contributed to his early losses were the same mistakes most investors make, namely 1) “They know too little about the company’s management, earnings, prospects, and possibility for future growth” and 2) “They tend to trade beyond their financial capital capacity”.

Baruch was a fundamentalist versus technical focused investor. In essence he required strong real assets of the company (cash and properties), that the company produced or performed something that is needed and valued, and that it had good management.

“Successful speculation requires staying on top of changes in industries and companies that either create new industries or improve on existing industries. The majority of your profits will come from these two … The shrewdest traders throughout history all adapted the skill of reactionary change, as the market constantly presents new and different opportunities.”

What drives stock prices is human reactions. Ironically, the key to successful speculation is to remove our decisions from our emotions. “Without control over your emotions, there is very little chance for profitable success in the stock market.”

Baruch often described the market as a thermometer and the economic environment as the fever. “The market does not cause economic cycles but merely reflects them and the judgments of what traders believe business and the future will be like.”

He believed no one could sell at the top and buy at the bottom (both for stocks and the market itself). “Don’t try to buy at the bottom and sell at the top. It can’t be done except by liars.” That said, Baruch said that through all of his time and research, he would develop a “feel” for when it was time to reduce positions. “I made my money by selling too soon.” While he didn’t have sell rules per se, he developed more of a sense that one gets when one trades for many years and follows the market with intense study.

“It is much harder to sell stocks correctly than to buy them correctly.” Because of the emotional aspect of trading, if a “stock went up, the average investor would hold because he wants more gains – he’s exhibiting greed. If the stock declines, he also holds on and hopes the stock will come back so he can at least sell and break even – he’s hoping against hope”. Baruch worked hard to avoid these emotions by recognizing mistakes early and taking immediate action to own up to his mistakes quickly.

Baruch believed that you had to take responsibility for your decisions. “Do not blame anybody for your mistakes and failures.” In addition, he blamed most of his losses on the failure of judgment and taking time to think. “Whatever failures I have known, whatever errors I have committed, whatever follies I have witnessed in private and public life have been the consequence of action without thought.”

It is important to “follow what the market is currently doing as opposed to following what one might personally think the market should do.” As he said, “Every man has a right to his opinion, but no man has a right to be wrong in his facts.”

Knowing your biases and weaknesses is important. “Only as you do know yourself can your brain serve you as a sharp and efficient tool. Know your own failings, passions and prejudices so you can separate them from what you see.”

Baruch was highly regarded and well-respected, but he frequently practised humility and understood the challenges of the market. He is often credited with the saying “The main purpose of the stock market is to make fools of as many men as possible”.

Taking time away from the market is necessary. He took many vacations and used the downtime to “reflect on past transactions”. For Baruch, this time away was important so he could have the peace of mind and concentration to reflect and improve his abilities. He devoted lots of hours and effort to examining past trades to find out why he lost money.

Source: Charles Kirk, The Kirk Report, 05 June 2008